There are thousands of companies all across the globe that are thriving to succeed in this competitive market. There are many ways in which any organization can reach the pinnacle of success. From looking at the legal aspects to financial matters, there are many things that the companies need to consider in order to reach their maximum potential.
Every company is legally required to prepare and consolidate financial statements when the accounting period ends. The purpose behind such is for the stakeholders to assess the performance. Unadjusted trial balance is one of the elements of financial statements that are looked forward to in order to achieve multiple purposes.
This piece of write-up will guide you through the distinctions between adjusted and unadjusted trial balance, preparation of unadjusted trial balance, examples of the unadjusted trials balances and other minimal aspects.
Difference between adjusted and unadjusted trial balance
Unadjusted trial balance is an accounting term that is used by many accounting, legal and taxation professionals. It is essentially utilized to identify all the mandatory adjusting entries that are required to be made at the end of the year. It is normally used as the starting point when you have to make an analysis regarding the account balances and therefore, perform adjusting entries.
Accrual system of accounting is widely used all across the globe, and this is why adjusting entries are usually made. Accrual accounting records expenses and revenue when they are incurred or earned regardless of cash exchange. There are five main types of adjusting entries. Whenever an adjusted trial balance is prepared which is in relation to accrued expenses and revenues, depreciation expenses and deferred expenses and revenues, these five types of adjusting entries are passed. Once all of these adjusting entries are passed, the trial balance will be termed as adjusted trial balance.
Accounting cycle has a number of steps. Adjusting the trial balance is usually the fourth step performed. Once the ledger accounts are posted with all the journal entries, the preparation of the unadjusted trial balance can be initiated. However, this is only utilized in double entry bookkeeping. A lot of companies use a single entry system, where it may not be possible to create a trial balance. This is because the total of debit will equate to the total of credits.
It is pretty much standard for most of the organizations to prepare this report. In fact, it has now become the norm. Given the necessity, most of the accounting software now issue this report in a standardized manner. Even though it can be manually compiled as well by many companies, it is recommendable to get it compiled through an automated system.
How to prepare an unadjusted trial balance?
As mentioned above, the fourth step in an accounting cycle is preparing an adjusted trial balance. Once the transaction is identified, recorded in the journal and posted into the ledger, preparation of the unadjusted trial balance begins. All the ledger accounts are thereafter listed in a form of summary which will be utilized later in the financial statements. Following is the stepwise procedure that must be followed in order to prepare an unadjusted trial balance:
- As discussed above, unadjusted trial balances can either be prepared manually or automatically. You can either use a simple sheet of paper or a spreadsheet program can be utilized as well. The first and foremost task that you need to perform is, to begin with, the heading.
- The heading is always mentioned at the very top of the sheet or spreadsheet. The heading will consist of some elements which may include the name of the company, date of the period of reporting and name of the trial balance. Once you have prepared the heading, you can move to the next step.
- Whenever you are undergoing preparation of unadjusted trial balance, make sure that three columns are used. The first column is used for showing the name of accounts, the second one is to demonstrate the debit balances and the last one can be utilized for credit balances.
- The ledger accounts with debit balances are normally demonstrated on the left side of the sheet i.e. the left column and all the credit balances are demonstrated on the right side.
- The accounts are normally arranged according to their account number. Almost all the companies and organizations have a chart of accounts. In these charts, a unique number is allocated to the business accounts. The normal practice within these organizations is that the chart accounts are numbered beginning from the balance sheet items. Therefore, the unadjusted trial balance shows the account numbers in a similar order beginning from assets, liabilities and accounts relating to equity and then it ends to income and accounts relating to expenses.
- Once you have finalized the format for preparation of unadjusted trial balance, you first need to include assets in the format such as equipment, property, plant, inventory, cash and other receivables etc.
- Once you have included all the assets in the trial balance, you need to include the liabilities and equity accounts in the same.
- Revenue items are to be included after that. Revenue is produced by the provision of services or sale of goods.
- The last item that you need to include in a trial balance is expense accounts. Since these have debit balances, you will enter them in the second column.
- Once you have performed all the aforementioned steps, the final step that you need to do is add both the credit and debit columns of the trial balance. You need to ensure that the sum of both the columns must equate to each other. If there is an anomaly, it would be pertinent to note that there is a problem with recording any transaction in the journal. Therefore, you need to review all the transactions and figure out where the problem is.
Examples of an unadjusted trial balance
Trial balance can be explained much better with live examples. Following is an example of a trial balance. All the positive numbers demonstrate debit balances for expenses and assets and the negative numbers, on the contrary, is representative of credit balances. Since the credits and debits offset each other, the total will always be zero. Following are two examples to follow
June 30, 2010
|Unadjusted trial balance||Adjusting entries||Adjusted trial balance|
|Fixed assets (net)||$200,000||$200,000|
|Cost of goods sold||280,000||280,000|
Unadjusted Trial Balance
For the year ended December 31 2010
|Furniture and fixtures||150,000|
|Property, plant and equipment||116,000|
|Long term loan||75,000|
Above are two major examples that you can refer to when understanding what an unadjusted trial balance is. However, this should just be treated as an example. Each and every company has a different way of preparing an unadjusted trial balance and therefore, you should always consult accounting experts to prepare the same. They will guide you through a better understanding of how to prepare unadjusted trial balance and therefore, it will reflect the condition of the company in a much better manner.
The bottom line
Above were all the major things that anyone needs to know about the unadjusted trial balance. Even though this is not an exhaustive piece of information, it covers almost all the important aspects that any individual, company or an accounting expert needs to know about unadjusted trial balance. Having a view at these aspects will give you academic and practical insight into how this particular element of accounting works and the preferred way to create these records.
However, it is always recommendable to use accounting software and consult with the relevant professionals who can guide over the different subtleties of the unadjusted trial balance. The process will become much more complex when there are hundreds of entries. Nevertheless, this complexity can be overcome by using automatic software which simplifies the process in a much more effective manner. All the financial transactions can be kept and secured in one place, irrespective of the form of currency and nature of the transaction. Payroll management becomes much easier and convenient through these platforms. Moreover, most of this software also provides easy integration which is one of the most beneficial things to have.
In conclusion, accounting professionals should not undermine the importance of unadjusted trial balance to get an idea of the financial status of any company. It helps to provide valuable insights, and therefore, the above information should be taken into account for a better review.